In 2007, Germany introduced a new parental leave benefit scheme, the so-called “Elterngeld”. The new benefit is an income-related transfer and is granted for a maximum period of 14 months. The more generous, but shorter Elterngeld replaced the former means-tested flat rate benefit that could be drawn for up to 24 months. One of the aims of the reform was to smooth household income in the year after childbirth and another to increase the incentives to return quickly to the labour market. In this study, we analyse empirically the change in income in the first year after birth and the effect of increasing incentives for mothers to return to the labour market in the second year after childbirth. We find that the average increase of net household income of families with a child in the first year after birth amounts to 480 euro per month. With respect to labour supply, we show that in the first year after childbirh, mothers’ labour supply decreases. In the second year labour supply of mothers in East Germany and low-income mothers in both parts of Germany increases.